You can buy commercial paper of a major U.S. corporation for $725,000. The paper has a...

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You can buy commercial paper of a major U.S. corporation for $725,000. The paper has a...

You can buy commercial paper of a major U.S. corporation for $725,000. The paper has a face value of $650,000 and is 90 days from maturity. Calculate the discount yield and bond equivalent yield on the commercial paper. (Show your work and calculations.)

Please solve it correctly.

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Answer 1

Answer #1

The discount yield on the commercial paper is calculated using the following equation

P-Po 360 icp(dy) = ? Pith

360 icp (dy) = $650,000 - $725,000 $650,000

Discount yield = - 46.15%

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The bond equivalent yield is calculated as follows:-

icp(bey) = x-P 365 Xh

365 $650,000 - $725,000 icp(bey) = ? $725,000

Bond equivalent yield = - 41.95%

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Answer 2

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